Article excerpt

Calculations of the median voter's return from "investing" in Social Security suggest that for a majority of voters the US. Social Security system provides higher ex-post, or actual, returns than alternative assets.

Acknowledgments: I would like to thank Sergi Jimenez Martin, Barbara Petrongolo, and two anonymous referees for helpful comments. Susana Sanchez Gomez provided excellent research assistance.

Summary

Several explanations have been proposed for why voters continue to support unfunded social security systems. Browning (1975) suggests that the extremely large unfunded pension systems of most democracies depend on the existence of a voting majority composed of middle-aged and older people who fail to fully internalize the cost of financing the system. In fact, when voting, economically rational workers consider only their current and future contributions to the system and their expected pension benefits-not their past contributions, which they regard as sunk costs. If, for a majority of voters, the expected continuation return from social security exceeds the return from alternative assets, an unfunded social security system is politically sustainable.

This article explores the validity of Browning's proposition by quantifying the returns that U.S. voters in presidential elections from 1964 to 1996 have obtained, or expect to obtain, from Social Security. Did "investments" in Social Security outperform alternative forms of investment, such as mutual funds or pension funds, for a majority of the voters? What can be expected for the future?

The U.S. Social Security system redistributes income within age cohorts on the basis of sex, income, and marital status. To account for some of these features, the median voter is represented by a family unit whose members-a husband who accounts for 70 percent of household earnings and a wife who accounts for 30 percent-make joint economic and voting decisions. Thus, retirement and survival benefits paid out to the spouse of an insured worker can be included in the calculation of Social Security returns. Interval estimates of voters' family incomes from the U.S. Census Bureau were used to obtain the median voter's household earnings. The median voter's age is derived from the ages of those who voted in presidential elections, not from the ages of the entire electorate.

The median voter's contributions to Social Security are the product of the joint employer/employee Old-Age and Survivors Insurance (OASI) tax rate and employee earnings. Data on actual contributions are available for median voters in the 1964 to 1976 elections; Social Security Administration (SSA) estimates are used for future tax rates and average wage growth rates. Data on actual old-age, retirement, and survivor benefits, as well as estimates of future benefits, are also available from SSA.

Analysis of ex-post returns from "investing" in Social Security and from a buy-and-hold strategy applied to three alternative assets-the Standard & Poor's Composite Index (S&P), the Dow Jones Industrial Average (DJIA), and U.S. government bonds-shows surprising results. In 1964 and 1968, Social Security largely outperformed the other three assets. In 1972, Social Security and the stock market performed almost equally. In 1976, however, the median voter would have been better off in the stock market.

The expected returns for median voters in later elections cannot be directly compared with realized returns from alternative assets. However, estimates

range from 5.7 percent in 1984 to 7.0 percent in 1996 and thus compare favorably with average returns of 5.6 percent for S&P, 5.3 percent for DJIA, and 2.1 percent for government bonds over the 1964-1996 period. Although these findings must be taken with caution since they compare ex-post returns, they show that, despite a continuous reduction in profitability, Social Security still represents a safe, high-return asset for a majority of families. …

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